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DEFENSE SPENDING: ITS EFFECT ON JOBS

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TAXPAYERS from New York City and its upstate and New Jersey suburbs were expected to contribute about $11.8 billion to the Pentagon in the fiscal year ended last month, $3 billion of which will return to the area through defense expenditures. That $8.8 billion gap between military tax dollars paid and benefit to the local economy from defense spending was the largest for any area in the country, according to Employment Research Associates, a nonprofit economic-consulting firm based in Lansing, Mich.

New York City may get the least economic benefit for its military dollar of any region in the country, but there is a wide circle of analysts who believe that the price paid by the entire country is much higher than the benefits, especially when measured by the creation of jobs. ''Defense spending is not only an inefficient way of creating jobs, it is a very competent way of destroying jobs,'' said Marion Anderson, a director of Employment Research. ''It has a major depressant impact on employment nationwide.''

Defense spending amounted to an estimated $214.8 billion in the 1983 fiscal year, or 26.7 percent of the total Federal budget and 6.7 percent of the anticipated gross national product. In supporting bigger defense budgets, Presidents and defense secretaries of both political parties have argued that defense spending bolsters industry by nurturing highly specialized electronics, such as the transistor, that eventually become full-fledged industries on their own. Today, 60 percent of the Government's spending for research and development is in defense.

The current Secretary of Defense, Caspar W. Weinberger told the National Association of Manufacturers in the spring of last year: ''I don't think we should spend money on defense because it is a good jobs- producing program, but the simple fact of the matter is that it is. These are new jobs that we are talking about. . . . Generally, unemployment declines and the economy grows a little faster as a result of the additional spending that we propose on defense.''

Yet industry in the United States, the Council on Economic Priorities concluded in an analysis last year on President Reagan's military budget, ''has had a poor record of translating military technology advances into competitive civilian products.''

The council, a privately funded research group in New York City, pointed out that even in electronics it was Japanese industry that perfected the applications for consumer products, like televisions, radios and video cassette recorders.

Many economists, including Martin Feldstein, chairman of the President's Council of Economic Advisers, as well as others working for major defense suppliers, emphasize that the decision to further increase spending of national defense should be based on the country's need for military strength.

''The defense buildup by the President is undertaken solely because we need to restore our military,'' Mr. Feldstein said earlier this year.

And Van Bussman, the chief economist for TRW Inc., a major supplier of electronics, satellites and missiles to the Pentagon, said in an interview:

''How much we spend on defense should not be decided on economic grounds. The debate ought to revolve around geopolitical issues.''

Though more dollars for defense are likely to help an already robust economic recovery in the short run, many economists, including Lester Thurow of the Massachusetts Institute of Technology, have argued that bigger military budgets could ultimately harm the economy. These defense increases, they contend, would widen Federal budget deficits beyond the $200 billion projected for 1984 and 1985, and could create shortages for thousands of products, which would lead to price increases that would ripple through the economy if the recovery continues.

Moreover, big increases in defense spending would probably attract even more highly trained engineers and technicians away from private industry to the Defense Department.

In the semiconductor and electronics industries in general, a shortage of engineers is considered the biggest impediment to innovation and overtaking foreign competition.

''There is probably a greater mismatch between the current skill levels of unemployed workers and available jobs than was true 10 years ago,'' said Robert A. Gough Jr., a senior vice president and economist at Data Resources Inc., an economic-consulting concern based in Lexington, Mass. ''That decline has been accentuated over the last five years, but there is not much happening with retraining.''

The Council on Economic Priorities echoed these and other points in a report entitled ''Military Expansion, Economic Decline,'' published in July. Its author, Robert W. DeGrasse Jr., also argued that the country's lagging rate of productivity growth, particularly when compared with those in Japan and West Germany, is partly linked to defense spending. Spending on defense, according to Mr. DeGrasse, redirects national wealth away from more productive uses in the private sector and, over time, gives an edge to foreign competitors ands ends up taking jobs away from Americans.

The 18th-century economist Adam Smith contended that military spending was less valuable to the economy than private enterprise because its output cannot be bought by consumers.

Stating the problem another way, Mr. DeGrasse wrote, ''The main impact of military spending probably is to divert labor and capital from emerging industries and to decrease the incentives to take financial risks.''

According to the study, for every $1 billion spent by the Pentagon to buy goods and services, 28,000 jobs are created in the private sector. The same investment would create 32,000 jobs if spent on public transportation, 57,000 if used for personal consumption and 71,000 jobs if spent on education, the report contended.

ASTUDY of the 1981 military budget by Employment Research, based on a computerized, input- output model of the economy, concluded that the $154 billion military budget caused a net loss of 1.5 million jobs that year.

It added that 26,000 jobs had been created for every $1 billion spent by the Pentagon for goods and services, compared with 38,000 jobs for every $1 billion in consumer spending.

A 1981 study prepared for former Gov. Edmund G. Brown Jr. of California by the state Office of Economic Policy, Planning and Research illustrated what some regard as the short-term benefits but long- term costs of defense spending. California, with its high concentration of aerospace and electronics defense contractors, including Hughes Aircraft, Northrop, Rockwell International, TRW and Lockheed, would be a leader of the ''space wars'' technology advocated earlier this year by President Reagan.

California already gets the biggest proportion of the defense dollar of any state. The total was 22 percent in 1981, but the Brown administration study said it would jump to 30 percent if President Reagan got all of the $1.8 trillion in defense spending he wanted over five years through 1986. That would have created about 670,000 new jobs in the state from both direct and indirect demand created by new defense dollars, according to Michael Kieschnick, an economist who directed the study. In addition, according to Mrs. Anderson of Employment Research Associates, 37 percent of the anticipated budget to produce the MX missile would go directly to California- based defense contractors.

The problem, Mr. Kieschnick added, was that the domestic spending cuts proposed by the President would have eliminated 1 million jobs in the state over the same period, for a net loss of more than 300,000 jobs.

Mr. Kieschnick said in an interview this autumn that when Mr. Reagan decided to accommodate huge budget deficits after having failed to get domestic spending cuts, these led to a period of high interest rates that deepened the recession and sparked high unemployment rates. He pointed out that California's nondefense economy, led by consumer electronics and telecommunications, agriculture and financial services, probably would have created many more jobs had the economy been healthier.

Largely because of the $200 billion government budget deficit and President Reagan's demonstrated aversion to raising taxes, the argument in Congress about Defense spending often has been phrased as a trade-off between defense and social programs like welfare, Social Security and Medicare.

Mr. Kieschnick said that because defense spending runs in what he described as inevitable up and down cycles, the state should put a tax on military spending to create a fund for job retraining.

One study by the Congressional Research Service of the Library of Congress showed that an equal cut in either defense or social programs would cause about the same amount of lost jobs in the economy. The report, issued last spring, said that a $10 billion cut in defense spending for fiscal 1984 would result in the loss of 369,000 jobs. A similar cut in domestic programs, excepting welfare and Social Security, would eliminate about 400,000 jobs.

Defense cuts, according to the study, hit hardest in these industries: ordnance and accessories; apparel; ferrous and nonferrous metals; rubber and miscellaneous plastics; radio, television and communications equipment; electronics components; motor vehicles and equipment; aircraft and parts, and transportation and warehousing.

The areas that benefit most from an increase in nondefense spending include financial, legal and accounting services, office computing and accounting machines, maintenance and repair construction, publishing and printing.

Mr. Gough stressed that cutting defense spending alone, even by 10 percent, or $20 billion, would not have much effect on a $200 billion budget deficit. ''In order to have it really matter, the Government would have to cut it in half, and that isn't going to happen,'' he said.

A better solution, he said, would be to cut both defense spending and domestic spending, while raising taxes to help close the deficit in the 1984 and 1985 fiscal years.

The cost to finance the deficit through ever-rising borrowings is expected to be about $95 billion in fiscal 1983, or about 11.5 percent of a Federal budget of about $830 billion. Mr. Gough said that figure could ''easily'' go to 15 percent by 1985, or nearly $150 billion.

A version of this article appears in print on October 16, 1983, on Page 12012005 of the National edition with the headline: DEFENSE SPENDING: ITS EFFECT ON JOBS. Order Reprints|Today's Paper|Subscribe